What is a share purchase plan (SPP)?

If you hold shares in a listed company you may be invited to take part in a share purchase plan (SPP). But what is a SPP and what are the pros and cons?

Why do companies do a share purchase plan?

An SPP is a way for a listed company to try to quickly raise some money from existing shareholders by offering them the option to buy new shares, without the need for issuing any formal prospectus, a document sometimes required when a company aims to raise funds.

The company will usually issue some guidance though, such as a booklet or other document, that details the timeframe of the SPP, what amounts you can bid for and the intended use of any money raised.

The document will also detail what price the new shares will be offered to shareholders. Shares are usually offered at a discounted price and with no brokerage or other fees.

But you need to be careful as the market share price of that company may change over the period of the SPP. You may still get any allocated shares at a discounted price, or they could be equal to or even higher than the traded price.

How do I participate in a share purchase plan (SPP)?

To be eligible to take part in an SPP you need to be a registered shareholder in that company by a certain date, as laid out in any offer documents.

The maximum amount you’re allowed to bid for in a company’s SPP is capped at $30,000 in any 12 month period, according to Australian Security and Investment Commission (ASIC) rules.

Shares are typically offered in set blocks, or within certain limits, and you’re not guaranteed to receive the full allocation you bid for.

For example, a 2021 SPP for Aussie Broadband (ASX: ABB) invited eligible shareholders to bid for set blocks of shares from a minimum of $2,500 to the maximum $30,000 in an effort to raise $10 million for the company.

The offer was heavily oversubscribed and the company ended up raising $20 million but it was forced to scale back bids so even those who applied for the maximum $30,000 were only allocated $5,400 worth of shares.

Aussie Broadband’s Managing Director Phillip Britt said at the time: “Despite doubling the size of the SPP raise, we know the level of scale back will be disappointing for many.”

The National Australia Bank (ASX: NAB) was also forced to scale back applications for an SPP in 2020 after the bank also increased the amount it was seeking to raise, from $500 million to $1.25 billion.

In the same year, an SPP by Qantas (ASX: QAN) failed to raise the intended $500 million but that meant the people who did apply for the discounted shares got their full allocation.

Should I participate in a share purchase plan (SPP)?

One of the advantages of an SPP is that it may allow you to increase your shares in a company without having to pay any extra brokerage or transaction fees. You may also get the new shares at a discounted price.

Fiona Balzer, the Policy and Advocacy Manager at the Australian Shareholders Association, told Canstar that an SPP could be good if you were already considering increasing your holding in a particular company in the first place.

“It’s an easy way to lift your holding in a company, without paying any brokerage,” she said.

“You don’t know how many shares you will get but you know the maximum you will pay.”

One of the downsides is that you may end up paying more for an SPP offer if the market price of the shares drops below any discounted offer during the SPP timeframe.

An SPP offer also means there will be more shares available for that company, which may have a knock-on effect on the market share price, again tipping it up or down.

“You might be better off buying any shares in the open market,” she said.

Ms Balzer said it was always wise to seek independent professional advice when considering any new share investment. She also said it was important to read any documentation a company provided about its SPP offer.

“Read the documentation,” she said.

“Everything you need to know should be explained in that document.

“But it may well be worth your while getting additional advice.”

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